With the news this week that RBS, the failed bank at the heart of the banking crisis, is to be heavily reinvested in by the Government to the tune of £39m, there remains much speculation over the future of bonuses. Stephen Overell of The Work Foundation spoke to Charlie Duff about the situation.
Money has been a traditional renumeration and motivation tool in the financial sector: could it face a life without bonuses? And will we shortly see an end to monetary bonuses, not just in finance, but across sectors?
Bonuses exist in almost all sectors to help motivate and incentivise performance. They’re used as a reward, for example, the annual Christmas bonus given in many industries to say ‘thank you’ to a worker.There’s nothing essentially wrong with this as Stephen Overell, associate director of The Work Foundation, explained: "The Christmas bonus is part of the basis of a good deal at work and it often has a role in incentivising people."
So what went wrong in the banking sector? Well as has been widely reported, lots went wrong. The bonus culture was one contributing factor, and the major difference between ‘city bonuses’ and financial incentives in other sectors was the size of the bonus. Bonuses in the higher echelons of the financial sector often eclipsed salaries in their size, therefore, they became the major factor in the banker’s lives. Large bonuses became so deeply entrenched in some areas that they were expected, and this expectation, teamed with a hunger to ‘make the bonus’, led to dangerous risk taking and contributed to the collapse.
Overell said: "It led to excessive risk taking, it led to people determined to get their bonuses at all costs and they embarked on activities and behaviours that drove the bonus but ultimately led to the collapse of the system. It’s a bit of a collective actual problem that individually it was perfectly reasonable for these people to go about ensuring they got their bonuses but collectively it led to too much risk."
This wasn’t the case for all workers. Those at the top commanded huge bonuses and incentives, plus high base pay. The recently announced ‘bonus ban’ only applies to those earning over £39,000 per annum. The ‘two-tier’ system, perceived as vastly unfair by the general public, has led to a deep resentment amongst workers, as Overell expalined: "The two tier, or several tiered, labour force means that the question of what’s good enough for the boss is very different to the question of what’s good enough for everyone else."
The Chief Executive of the CIPD, Jackie Orme, and acceptance of her bonus, is a case in point. The CIPD is reported to have been making pay freezes, but still found the money to reward Orme, although her base pay was also frozen. The question over whether she should hand the bonus back caused some ripples in the HR press and the organisation. It was pointed out that the bonus was related to short and long term goals and incentives, but with the CIPD not hitting its financial targets this year, the organisation had to decide whether it was appropriate to reward at all.
With the public baying for blood over bonuses, and understandably shocked about the sheer amount of money the higher tier of bankers commanded, the question remains of how to motivate without money. Motivation in the financial sector appeared to be all about financial renumeration. But as Overell points out: "Motivation has to be conceived not just in financial terms. Money is important, and feeling you’re paid fairly for what you do. "
Overell explained further: "It’s about the relationship you have with your colleagues, it’s about the systems that operate within the organisation, it’s about fairness, about procedural justice: all these fundamental HR things."
He continued: "Great organisations are founded on a set of beliefs, a world view about producing quality services, good jobs, serving customers well, all these really profound business-purpose values. What’s happened over recent years is that a lot of this has disintegrated and the things which have come to replace it are short term rewards, short term profit and shareholder value optimisation and this has led, ultimately, to the collapse of the whole system."
The ‘expectation’ of bonuses stored up trouble for business and performance alike, changing and degrading the meaning of the bonus. What should bonuses look like? "Bonuses should be used to reward and incentivise stellar performance," said Overell, "But perhaps there should be the consideration of caps on them because these are seen as having a role in the crisis, and probably did. They also need to revise their scope so that bonuses are not seen as another part of reward but as something you have to work very hard to get."
Perhaps bankers will heave a sigh of relief, but HR has to become more clever when it comes to reward. Overell said: "Bonuses are very definitely back, and there’s a very strong reaction against them, but I think the financial service sector does rely very heavily on them and the debate is not about getting rid of them, it’s a question of the management of bonuses."
So what’s in store for the financial sector? Reform? Bonus ban? If so, what will the financial sector do to avoid the potential brain-drain – increase pay? Overell added: "I think if you’re determined to reform bonuses you’ll have to look at other types of renumeration. It shouldn’t just be higher pay. It might be time for caps on bonuses. If you have something which makes the system liable to fall over, which I think bonuses do, then you need to think about how to reform, which is going to require some kind of system-wide thing rather than just relying on individual firms."
It’s clear that HR, especially in the financial sector, needs to be more inventive when it comes to incentives, and engaging and motivating employees. Using bonuses in the right way should incentivise but not encourage unstable behaviour and risk taking. We haven’t seen the end of the bonus, but a new era may be beginning of better talent management and incentives.
6 Responses
Good points
The military is a good point. David Macleod at a recent conference (on Armstice day, in fact) did point out that we have a lot to learn from the armed forces as an example of ultimate engagement.
I think, having looked at the issues presented by Gen Y (without an entirely independent view: I must admit now that I am a Gen Y, or millenial, born right in the middle of the period too, no borderlines or crossovers) it’s true that Gen Y is not motivated entirely by money: interesting work is what gets us up in the morning. But I think ‘Gen Yers’ could learn to accept big bonuses in the financial sector just the same as any other generation, if they ended up there.
Perhaps, however, they are less susceptible and more likely to be open to change in this area: at the same conference, the HRD of eBay, Annemie Ress, told how her best hires do often come from the finance sector: but they are the ones jaded by the lack of depth and continual pressure, those with high talent who want more out of life. eBay is a place they find it, according to Ress. But if they expect big bonuses and sky-high salaries, they don’t fit in at the company. And Doug, the funds you mentioned are exactly what eBay does: as does Innocent, where they fund a scholarship, which employees pitch and vote for. Employees can do whatever they want with it, but both companies have found the staff funds a tool for engagement (especially when employees use the money to fund teambuilding activities – see my blog post here to see the latest idea they had).
Gen Y is still relatively new in the workplace – what are you going to do to engage them without bonuses?
What do the forces do that we could do in business?
Is interesting work so hard to provide?
It’s Not About Savings
Keep coming back for more 🙂
RTowers suggests there are savings to be made by binning the bonus culture. I would far rather see the way forward as some more pay for staff plus creative options like a development fund. The money saved through releasing all the people needed to calculate bonuses could be used to fund the direct pay bit, and the other fun/creative stuff would have to fluctuate as overall performance does.
Yuvarajah’s point about "How come there is a mismatch between survey findings and actual practices?" fascinates me. I wonder often about the lack of leadership among organisational leaders, how can they not get this? Are we living life through an optical illusion? Why are so few leaders seemingly not able to lead. I don’t wish to criticise, my own experiences of the upper layers of senior management often reveals a lot of fear and loneliness, and these are not great emaotions to manage when it comes to being a good leader. They don’t know who to trust, they tend to get told what they want to hear, the real front line view is never shown to them directly and in the case of listed companies, they are driven to deliver short term for the city. Oh dear.
Individual Rewards Promotes “Me” instead of “We”
Life without bonus?. Yes, you can, if you choose to.
Charlie, did say "Bonuses exist in almost all sectors". All we need to is learn from those sectors where bonus does not exist. I know one sector – the military. Go research how they work and then follow how come they are not so neurotic about individualised bonus.
I came from it, hence am qualified to say we did just fine without bonus. We worked just as hard for the organisation, drawing the same satisfaction on Maslow’s heirarchy and had something that kept us distanced from the "ME" culture. It’s called teamwork and esprit de corp.
However, in the late 90’s, the Malaysian government introduced bonus into its bureaucracy and thus the Military joined the bandwagon. But, unlike what you find in the "profit" centred circle, bonus payout is not varied or differentiated. The PM announces it during the budget and everyone get’s the same value across the board, including the top guns and "Stars". I guess you can say it is more an ex-gratia payment for the collective team effort, contrary to what you find in "for profit" businesses.
I personally feel only those with self-centred glorification will promote and support this model of justifying money to reward and induce performance. If anyone says it’s a healthy practice, they don’t understand teambuilding. If its is indeed good why not make it open and transparent. Why all the secrecy?. If you say merit performance, then don’t just tag bonus to only positive results. If you don’t meet the expected target or record negative performance, the full weight of the principle must also apply, without exception. But, this was not how it happened with Lehman, AIG, and GM. Where was the accountability?. All this points towards financially greedy crooks who bring in oxymoronic schemes and manuevers that does more long term damage internally to teamwork and externally to society. People have become so obsessed with money and materialism, that even in bad times they expect to be paid at the expense of people. What is the logic?.
If this keeps up, what would be the impact on the future generations (Gen Y), as worldwide research by Hewit, Towers Perine and Deloitte have found that "money" is not high on the list of criteria. How come there is a mismatch between survey findings and actual practices.
Personalised Learning
What a well written, interesting piece. As one who has called for the ban on financial incentives for a long time, I’m pleased to see more air time being given to this subject. One alternative to financial rewards could be personalised learning. If you want a quick read about the power of personailsed learning feel free to check out Learning breeds loyalty.
Of course there’s always the simple thank you for a job well done to help create the wow factor.
Performance related pay
I agree with P Towers. Arbitrary bonusses are dangerous, often easily fiddled and often corrupt pay structures. They are especially dangerous if they are too large in comparison with basic pay or salary. They can encourage cheating, high scrap and waste. If they are individual bonusses they discourage team-working. They need to be carefully monitored and regularly reviewed.
The principles and problems were set out years ago, notably by Wilfred Brown at the Glacier Metal Company. They were restudied in the 1970s by the NPBI whose report is still worth reading.
A one dimensional view
As someone who has worked as an HR person is a sales-oriented environment I regard bonuses with dread. In the end I feel that whatever employers do they are on to a loser. A cash payment is a single reward for what is likely to be a complex patterns of behaviours with a lot of factors. The choice is between a simple system related to a single parameter or a complex system which attempts to balance a number of competing factors. It is all but impossible to come up with something which is universally perceived as being fair and motivational.
I agree comepletely that employers need to be more creative in the way they motivate and reward. Cash bonuses often represent a lazy, cynical approach to managing performance. It is as if they are trying to make up for a failure to manage people effectively by buying them off with a brown envelope once a year. I believe many employers could save a fortune on bonuses by taking an interest in the people and telling them when they have done a good job.